Am I better off with a Trust or a Will? Good question! And one, as a Trust and Estates Practitioner, that we are regularly asked.
To explain the relative merits of the two options and to advise on which should be used, is actually not that simple, however – which is precisely why confusion can arise.
What Trusts and Wills have in common, of course, is that they are both concerned with estate planning and the most effective ways of ring-fencing, and ultimately passing on, one’s estate.
As to which is the most suitable, much can depend on who you are and your particular circumstances. For that reason, we like to take the time to understand the mindset of the person who’s posed the question. For instance, anyone looking to establish a Trust first needs to be comfortable with the concept of giving away assets whilst they are still alive – which is, in essence, what they’ll be doing when creating a Trust.
This then brings a third option into play – Gifts – the act of giving assets away during your life time to those who might also be future beneficiaries from your Will. Cue more head scratching!
So, what is the best general advice that one can give about the individual and collective use of Trusts, Wills and Gifts?
Firstly, it is essential to understand the difference between the three basic choices, the timing of each and how they can be altered and used in conjunction with each other.
A Trust is created when certain assets are transferred from its creator, or Settlor, to a Trustee or Trustees, to be held in Trust for designated beneficiaries. Legal ownership passes to the Trustee/s who is obligated to manage the Trust for the beneficiaries until its termination.
Trusts come in a number of guises – Discretionary Trusts, Life Interest Trusts, Will Trusts, Bare Trusts, Accumulation and Maintenance Trusts, even Secret Trusts. Regardless of their exact type, for a Trust to be effective, it has to have three qualities, known as the “three certainties”. It must a) have a subject (the “assets”, b) be clear that it is a Trust, and c) have beneficiaries which can be identified.
The Trust acts like a safe deposit box for any assets that are placed into it. Instead of those assets forming part of your estate and going to probate, those assets are removed from your estate and are afforded protection by the Trust, which can:
• reduce taxes payable, such as Inheritance Tax
• avoid timely and costly probate
• offer protection from debt collectors and divorce settlement
• prevent your home from being sold to pay for care.
If a Discretionary Trust is established, it is common for the Settlor to provide the Trustees with a Letter of Wishes. Whilst this isn’t binding upon the Trustees, it does provide them with a guide as to how the Settlor would like the Trust administered during his or her lifetime and beyond. Throughout, further assets can be added to the Trust and the Settlor can make amendments to the Letter of Wishes as and when desired, to take account of changes in their personal circumstances.
In contrast to a Will, to create a Trust, to add assets to it and to keep your wishes up to date needn’t be time consuming or costly.
There are also other benefits of placing assets into Trust during your lifetime.
First and foremost, as you have, in effect, made a Gift of those assets whilst you are alive, your subsequent death does not affect the ownership of those assets – they continue to be held in Trust by the Trustees. Therefore, if there are any disenfranchised or disappointed heirs, they’ll have little chance of recourse to the Courts to make a claim on the assets in the Trust.
Secondly, establishing a Trust in a jurisdiction such as the Isle of Man, means that Inheritance Tax (IHT) may be avoided on assets placed in the Trust. IHT is a tax levied on your estate after both parents are deceased and typically charged at a hefty 40%. So, with some simple estate planning, utilising the Trust option can increase the amount of inheritance passed down to your offspring.
The thing about Wills – and something like 70% of people never make one – is that they don’t go out of date and they only become effective upon death. They just sit there, waiting for you to die, unless you revoke your Will by destroying it, make a new one or get married.
The basic rule is – if you have something to leave after you die, but you don’t want to gift anything beforehand, then make a Will. It is the only way of guaranteeing that your property (car, house, jewellery, life insurance etc) goes to where you want it to go – and of decreeing who should look after any children who might be under the age of 18.
Although it is not required by law to make a Will, if you die without having made one, then your assets may be distributed according to the law, rather than according to your wishes.
A Will can be amended at any time, however – perhaps to take account of a change in circumstances, or the acquisition of further assets not already dealt with by the existing Will, or even because of a change of heart.
In the event of death, the Executors, who will be named in the Will, are required to obtain a Grant of Probate. The Executors carry out the disposition of the deceased’s estate, in accordance with the Will, although this can take some time. It should also be noted that there can be challenges to the terms of a Will by disenfranchised or disappointed heirs and this can lead to greater delays or, in some circumstances, a Will being set aside, or the dispositions not being met. It is also possible for all of the heirs under a Will to enter into a Deed of Variation or a Deed of Family Arrangement, to alter the terms of the Will, after the death of the Testator.
It should also be taken into consideration that an Executor may be unable or unwilling to act at the time a Will comes into effect, the result of which will be that an alternative Executor has to apply for Probate, causing further delays and complications. Furthermore, if a Will is made prior to being married, a future marriage will invalidate the existing one.
Whilst it is not uncommon for a husband and wife to make Joint and Mutual Wills, if they were to divorce prior to death, both Wills become invalid and each would have to make a new one. Also, if one of the couple dies early in life, and the surviving spouse finds a new partner, a new Will may have to be made to take account of their change in circumstances.
Additionally, where there are assets held in a foreign country, it’s not unusual for people to have a separate overseas Will.
So although writing a Will might start out as being a one-off exercise, this is rarely the case!
Put simply, Gifts are only ever made during your lifetime. Depending upon what assets you are giving away, the method of doing so can be as simple as “Gifting” a car or a piece of jewelry or transferring funds from your bank account to that of the recipient. Gifts can be seen as an important estate planning tool, because they can reduce the size of an estate, which may result in savings in probate expenses and IHT.
Gifts can also accomplish income tax savings during life, for example by shifting income producing property from one family member to another who may be in a lower tax bracket.
Lifetime gifts, however, whether to a spouse, children or others, should be examined very carefully. Those making the gifts should be sure they are not depleting assets to the point they do not have enough for their own support.
As you can see, in deciding whether to opt for a Trust over a Will, or vice versa, it’s not necessarily a cut and dried selection. It really comes down to personal circumstances – and everybody’s are different.
The good news is that there are a number of choices on the table, offering plenty of scope, and we hope this provides a reasonable overview of what those options are.